Question

Here are simplified financial statements for Phone Corporation in a recent year:

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	12,400
Cost of goods sold		3,660
Other expenses		4,137
Depreciation		2,278
Earnings before interest and taxes (EBIT)	$	2,325
Interest expense		645
Income before tax	$	1,680
Taxes (at 30%)		504
Net income	$	1,176
Dividends	$	796

  

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Cash and marketable securities	$	81			$	150
Receivables		1,982				2,330
Inventories		147				198
Other current assets		827				892
Total current assets	$	3,037			$	3,570
Net property, plant, and equipment		19,893				19,835
Other long-term assets		4,136				3,690
Total assets	$	27,066			$	27,095
Liabilities and shareholders’ equity
Payables	$	2,484			$	2,960
Short-term debt		1,379				1,533
Other current liabilities		771				747
Total current liabilities	$	4,634			$	5,240
Long-term debt and leases		9,010				8,265
Other long-term liabilities		6,098				6,069
Shareholders’ equity		7,324				7,521
Total liabilities and shareholders’ equity	$	27,066			$	27,095

Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

a.Return on equity (use average balance sheet figures)%

b.Return on assets (use average balance sheet figures)%

c.Return on capital (use average balance sheet figures)%

d.Days in inventory (use start-of-year balance sheet figures)

e.Inventory turnover (use start-of-year balance sheet figures)

f.Average collection period (use start-of-year balance sheet figures)days

g.Operating profit margin%

h.Long-term debt ratio (use end-of-year balance sheet figures)

i.Total debt ratio (use end-of-year balance sheet figures)

j.Times interest earned

k.Cash coverage ratio

l.Current ratio (use end-of-year balance sheet figures)

m.Quick ratio (use end-of-year balance sheet figures)

Answer 1

Solution:

a) .Return on equity = Net Income / Average Equity

b) .Return on assets = Net Income / Average assets

c) Return on capital = EBIT / (Assets - Current liability)

d) .Days in inventory = 365 / Inventory turnover, Invemtory turnover = COGS / Inventory

Invemtory turnover = COGS / Inventory =  3,660 / 198 = 18.4848

Days in inventory = 365 / 18.4848 = 19.75 = 20 Days

e) Inventory turnover = COGS / Inventory =  18.4848

f).Average collection period = 365 / AR turnover, Account receivable turnover =Sales / AR

Account receivable turnover =12,400 / 2,330 = 5.3218

Average collection period = 365 / 5.3218 = 68.58 = 69 days

g.) Operating profit margin = EBIT / Sales = 2,325 / 12,400 = 18.75%

h) .Long-term debt ratio = Long term debt / assets = 9,010 / 27,066 = 0.33

i.) Total debt ratio = (Long term debt +short term debt ) / assets =( 9,010+ 1,379)/ 27,066 = 0.38

j.) Times interest earned = EBIT / Interest = 2325 / 645 = 3.60

k) .Cash coverage ratio = Total cash / Interest = 81 / 645 = 0.13

l)Current ratio = Current assets / Current liability = 3,037 / 4,634 = 0.66

m) Quick ratio =(Current assets - Inventory ) / Current liability =(3037- 147) /  4,634 = 0.62